1. Full convertibility of rupee ‘inescapable’ but RBI still wary

Full convertibility of rupee ‘inescapable’ but RBI still wary

Top RBI official downplayed the possibility of a fully convertible rupee even though he agreed that such a move...

By: | Mumbai | Published: May 19, 2015 12:13 AM

Top RBI official downplayed the possibility of a fully convertible rupee even though he agreed that such a move was “inescapable”.

RBI executive director G Padmanabhan said an unrestricted access to the capital account of a country is riddled with several negatives and India still needs to strengthen many of the pre-conditions for such a move.

“A freely convertible country must have sound, credible and time-consistent macroeconomic policy,” Padmanabhan said in a speech, a copy of which was posted on the RBI website on Monday. “What does that translate into, operationally? Fiscal prudence and low inflation. Where do we stand in respect to these parameters?” he said.

Padmanabhan said the pace of full capital convertibility will depend on how fast the country can achieve key conditions such as fiscal consolidation, inflation control, low level of NPAs, low and sustainable current account deficit, and strong financial markets.

After more than two years of high and unsustainable current account deficit and double digit inflation, India’s CAD and retail inflation have both fallen. The consumer price index (CPI) inflation was 4.87% in March while CAD for 2014-15 is said to be lower than 1% of the gross domestic product. However, the banking sector’s bad loan stockpile has risen exponentially over the two years and fiscal deficit is still around 4% of GDP.

The official’s comments come in the wake of RBI governor Raghuram Rajan’s statement that full convertibility is a priority with the central bank.

Padmanabhan noted that the fruits of full convertibility in terms of productivity are huge and cannot be ignored by an economy that aspires to integrate with the global economy. “While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive,” he said.

The executive director said the response to rupee-denominated debt overseas has been encouraging and the RBI is working on a framework that would further encourage such issuance.

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